Commercial buildings normally depreciate on a straight line over 39 years. A cost segregation study breaks that assumption apart — an engineering-based analysis that identifies which components of a property (certain electrical and plumbing tied to specific equipment, decorative fixtures, carpeting, site improvements like parking lots and landscaping) actually belong in much shorter 5-, 7-, or 15-year depreciation categories under IRS rules. Reclassify those components correctly, and they become eligible for bonus depreciation — which in 2026 means writing off a large share of a building's value in year one instead of over decades.

Why 2026 changes the math

Bonus depreciation had been on a scheduled decline: 100% in 2022, 80% in 2023, 60% in 2024, and just 40% for property placed in service in the first weeks of 2025. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, reversed that — 100% bonus depreciation is now permanent for qualifying property placed in service after January 19, 2025. That's the single biggest factor in whether a cost segregation study pencils out: at 100%, every dollar of reclassified 5-, 7-, or 15-year property is fully deductible immediately, not phased in at a reduced rate.

What doesn't qualify

A cost segregation study doesn't turn the whole building into a bonus-eligible write-off. Structural components — the building shell, and specifically roofs and HVAC systems on nonresidential property — generally still depreciate on the standard 39-year schedule even after a study identifies them, because bonus depreciation is limited to property with a recovery period of 20 years or less. A study typically reclassifies somewhere between 15% and 40% of a property's cost basis, depending on the asset type; it's not an all-or-nothing swing.

How the study actually works

A qualified cost segregation firm (usually an engineering or specialized tax-and-engineering firm, not just a CPA) does a site visit, reviews construction documents or an appraisal, and produces a report allocating cost basis across depreciation categories in a way that will hold up under an IRS audit. You don't have to do this in the year you buy the property — a "look-back" study on a building you've owned for years can still capture the missed depreciation through a Form 3115 accounting-method change, without amending prior tax returns.

Where it fits with a 1031 exchange

A property acquired through a 1031 exchange is still eligible for a fresh cost segregation study on the replacement property — the deferred gain from the exchange and the new depreciation schedule from the study are separate benefits that stack. That combination is a meaningfully bigger deal in 2026 than it was in the phase-down years, since the reclassified components are now fully deductible in year one rather than at a reduced percentage.

The tradeoff to know going in: depreciation you take now (including accelerated depreciation from a cost seg study) is generally recaptured at sale, taxed at a 25% federal rate on real property gain attributable to depreciation (Section 1250), separate from the regular capital gains rate on the rest of the gain. A 1031 exchange defers that recapture the same way it defers the underlying capital gain — which is part of why cost segregation and 1031 planning tend to go hand in hand for investors who plan to keep trading up rather than cashing out.

Cost segregation and cap rate — two different things

It's worth keeping these separate: cap rate is calculated from a property's net operating income (NOI), which is a pre-tax, pre-depreciation number. Cost segregation doesn't change NOI or make a property worth more to a buyer pricing off market cap rates — it's a return enhancer at the ownership level, driven by your specific tax position, not a reason to pay above market for a deal.

What we look at with you

We're not a substitute for a cost segregation engineer or your CPA, but before you're deep into a purchase we look at whether the property type and purchase price make a study worth commissioning at all (smaller deals sometimes don't clear the cost of the study itself), whether you're buying through a 1031 exchange where the timing interacts with your identification and closing deadlines, and how the deal fits your broader portfolio across industrial, office, retail, and Southern Indiana assets. Financing the purchase itself is covered separately in our commercial real estate loans guide.

Frequently asked questions

What is a cost segregation study, exactly?

An engineering-based analysis that reclassifies specific components of a commercial building — certain electrical, plumbing, fixtures, flooring, and site improvements like parking lots and landscaping — from the standard 39-year depreciation schedule into 5-, 7-, or 15-year categories, making them eligible for bonus depreciation.

What property is not eligible for bonus depreciation even after a cost segregation study?

The building's structural shell generally isn't, and roofs and HVAC systems on nonresidential property specifically are excluded even when a study identifies them, because bonus depreciation only applies to property with a recovery period of 20 years or less.

Is 100% bonus depreciation really permanent now?

Yes — the One Big Beautiful Bill Act, signed July 4, 2025, made 100% bonus depreciation permanent for qualifying property placed in service after January 19, 2025, reversing the scheduled phase-down that had brought it down to 40% in the first weeks of that year.

Can I do a cost segregation study on a building I've owned for years?

Yes — a "look-back" study can capture depreciation you missed in earlier years through a Form 3115 accounting-method change, without needing to amend your prior tax returns.

Does cost segregation help or hurt if I plan to sell in a few years?

The accelerated depreciation is generally recaptured at sale (taxed at a 25% federal rate on the portion of gain attributable to depreciation), so the benefit is really a timing advantage — more deduction now, some of it repaid later. A 1031 exchange defers that recapture the same way it defers the rest of the capital gain, which is why the two strategies are often paired.

How does cost segregation interact with a 1031 exchange?

A replacement property acquired through a 1031 exchange is still eligible for its own fresh cost segregation study. With bonus depreciation permanently at 100%, that combination front-loads deductions on the new property while the exchange itself keeps deferring tax on the original gain.